Is uncertainty responsible for high unemployment?

What is causing continued slow economic growth and high unemployment in America? On Friday at AEI, Sanjai Bhagat of the University of Colorado at Boulder discussed his research exploring the correlation between job losses and persistent unemployment. Bhagat began with a presentation of the paper he co-wrote with Iulian Obreja. Noting historically high cash flows and recent capital injections from the U.S. Federal Reserve, Bhagat suggested that capital shortfall cannot explain America’s currently weak economic recovery. Instead, Bhagat asserted that high business uncertainty results in a significant reduction in job creation and investment.

Adriana Kluger of the U.S. Department of Labor challenged Bhagat’s assumption about the correlation between low investment and uncertainty, stressing that the paper should have used more robust econometric measures. She furthermore cautioned against interpreting Bhagat and Obreja’s results to mean that policy uncertainty is the cause of low corporate investment.

Following Kluger, Kenneth Lehn of the University of Pittsburgh elaborated on the difficulty in establishing a causal relationship between uncertainty and unemployment. Lehn advised conducting event studies to determine the effect of specific policies on the uncertainty index Bhagat employed. Finally, AEI’s Stan Veuger pointed out that a separate, media-tracking measure of uncertainty reached a conclusion that mirrors Bhagat’s findings about the correlation between uncertainty and unemployment. Nonetheless, Veuger stressed that further work is necessary to establish a causal link.

Event Description In this election year, the underlying causes of the continued slow growth and high levels of unemployment in the U.S. economy are of particular interest. Much of the debate has focused on whether uncertainties faced by private employers — on taxes, regulation and other costs — are responsible for the slow recovery of employment since the 2008 financial crisis. Sanjai Bhagat and Iulian Obreja of the University of Colorado have produced a paper that correlates cash flow uncertainty with job losses and declines in capital investment. In this event, participants will review the Bhagat-Obreja paper and consider the role of uncertainty in major business decisions. In addition to commenting on the Bhagat-Obreja paper, Stan Veuger of AEI will describe the uncertainty index that has been developed by AEI economists and others.

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Sanjai Bhagat is a professor of finance at the University of Colorado at Boulder. He has worked at the U.S. Securities and Exchange Commission, Princeton University and the University of Chicago. With over 20 years of experience in corporate finance, corporate law and corporate litigation, he has advised U.S. government agencies and Fortune 500 companies on corporate governance and corporate law. Bhagat has published extensively in leading academic finance and law journals, such as the Journal of Finance, Journal of Financial Economics, American Law and Economics Review, Columbia Law Review, and Journal of Corporation Law. He is a board member of Integra Ventures, a venture-capital company, and of the Colorado chapter of the National Association of Corporate Directors. He is also a founding director of the TiE-Rockies (The Indus Entrepreneurs), a professional group serving technology entrepreneurs.

Adriana Kugler is chief economist to U.S. Labor Secretary Hilda L. Solis. She is currently on leave from her position as full professor of public policy at Georgetown University. A research associate with the National Bureau of Economic Research in the Labor Studies program, she is also a research fellow of the Center for Economic Policy Research in London, the Institute for the Study of Labor in Bonn, the Centre for Research and Analysis of Migration in London, and the Center for the Study of Poverty and Inequality at Stanford University. Kugler serves on the editorial boards of the Industrial and Labor Relations Review, the British Journal of Industrial Relations, Labour Economics, and Economia. She has published widely in leading economics journals about the impact of public policies on employment and earnings. Her work has been covered in both print and television media and featured in leading world economic reports. She was the 2007 recipient of the John T. Dunlop Outstanding Scholar Award from the Labor and Employment Relations Association in recognition of her research contributions to the field of labor and industrial relations.

Kenneth Lehn is the Samuel A. McCullough Professor of Finance in the Katz Graduate School of Business at the University of Pittsburgh, where he teaches courses on business valuation and corporate restructuring. Lehn also is an adjunct professor of law at the University of Pittsburgh School of Law. He joined the faculty at the University of Pittsburgh in 1991 after serving as chief economist of the U.S. Securities and Exchange Commission for four years. His research focuses on topics in corporate finance, including mergers and acquisitions, corporate governance and capital structure. In addition, he has written on topics relating to the economics of professional sports. Lehn has published in leading academic journals, including the Journal of Financial Economics, Journal of Finance, Journal of Political Economy, American Economic Review, and Journal of Law and Economics, and he is a founding editor of the Journal of Corporate Finance. He has served as a consultant for numerous firms and government agencies, including J.P. Morgan Chase, Lehman Brothers, The Walt Disney Company, Marriott, Procter & Gamble, AT&T Wireless, the National Hockey League, the Department of Justice, and the Securities and Exchange Commission.

Stan A. Veuger is a research fellow at AEI, where he specializes in the intersection of economic and political behavior, public finance, banking, and macroeconomic policy. In particular, he has researched voter behavior, political activism, banking supervision, and the impact of economic policy uncertainty. At AEI, Veuger is concentrating on the political and policy impact of the Tea Party movement, on the relationship between job losses and economic policy uncertainty, and on online financial transactions fraud.

Peter J. Wallison holds the Arthur F. Burns Chair in Financial Policy Studies at AEI, where he co-directs the institute’s program on financial market studies. He is also a co-chair of the Pew Financial Reform Task Force and a member of the congressionally authorized Financial Crisis Inquiry Commission. Wallison previously practiced banking, corporate and financial law at Gibson, Dunn & Crutcher LLP in New York and Washington, D.C. In 1986 and 1987, Wallison was White House counsel to President Ronald Reagan. From 1981 to 1985, he was general counsel of the U.S. Treasury Department, where he played a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry. He also served as general counsel to the Depository Institutions Deregulation Committee and participated in the Treasury Department’s efforts to deal with the debt held by less-developed countries. Between 1972 and 1976, Wallison was special assistant to New York governor Nelson A. Rockefeller and, subsequently, counsel to Rockefeller when he was vice president of the United States.